Tough Terms May Land Apple's Subscription Service in Hot Water

Regulators in the U.S. and Europe are sending "not so fast" signals to Apple regarding its new digital content subscription service. Although no official investigations have been announced, authorities reportedly are concerned about the stiff commissions Apple wants to take, as well as the restrictions it wants to place on how publishers can peddle their own content both inside and outside the App Store.

The U.S. Justice Department and The Federal Trade Commission have started to examine Apple's new in-app subscription plan, according to The Wall Street Journal's sources. The agencies are determining whether Apple is violating antitrust laws with its subscription plan that was unveiled this week. European Union antitrust regulators are also keeping an eye on Apple's new service, reported Reuters.

Apple will nab a 30 percent commission from publishers selling though the App Store, and it forbids publishers from offering a lower price for their content outside the store. This could be viewed as an anticompetitive tactic that would restrict competition.

If an investigation is undertaken, regulators are likely to consider the overwhelming share Apple holds in the tablet market.

Google also announced a subscription service, One Pass, this week, but its model appears to be less restrictive than Apple's.

Neither Apple, the Department of Justice, nor the Federal Trade Commission responded to the E-Commerce Times' requests for comments by press time.

Apple Likely to Comply

Apple may simply back away from any practices that are challenged.

The company "has been pretty good so far at dodging these things," Rob Enderle, principal analyst at the Enderle Group, told MacNewsWorld.

"They're good at looking at which way the wind is blowing and capitulating before it goes to trial -- unlike what Microsoft did when they had their own problems with the Department of Justice," he observed.

"Apple will do what ever is necessary to keep out of court," predicted Enderle. "They've seen the downside of these things, so they typically capitulate."

Competition Heats Up

Though it's an undisputed market leader, Apple is facing an onslaught of competition these days.

"Apple's iPhone is in cutthroat competition with other mobile ecosystems, such as Google's Android platform and Research In Motion's BlackBerry," Ryan Radia, associate director of technology studies at the Competitive Enterprise Institute, told MacNewsWorld.

"Any mobile player that harms consumers will be swiftly punished by these relentless competitive forces," he maintained.

Publishers have plenty of options besides Apple, of course, even if Apple does present an appetizing collection of consumers.

"If media firms that want to offer subscriptions to mobile users aren't happy with Apple's terms, they are free to go elsewhere. Google's own subscription offering is just one example of how the market is responding to Apple's latest move," noted Radia.

"Apple risked billions of dollars investing in a popular, innovative ecosystem, and it has the right to set prices and terms free from government intervention," he opined.

Torrent of Tablets

New tablets are flooding the market, which means a big boost in potential subscribers.

"I don't see any real grounds for the Justice Department to be looking into Apple's new payment plan for print media," Porter Bibb, managing partner of
Mediatech Capital Partners (and former Rolling Stone publisher), told MacNewsWorld.

"There is no monopoly or restraint of trade here, since over 100 tablets were demonstrated at last month's CES in Las Vegas, and most of them will be using an Android operating system," he pointed out. "Most will be delighted just to get magazines and newspapers on their tablets."

Google will reportedly charge publishers a 10 percent fee for participating in its One Pass subscription service.

"Some may charge a small fee, but nothing like the 30 percent Apple has proposed," said Bibb, "and none will hold back subscriber information the way Apple, cynically, has done -- letting it be at the customer's option, which Apple knows few, if any, customers will grant."

Apple has a huge customer base, which it channels media to via iTunes and the App Store.

"The appeal Apple has is the 15 million iPad owners out there now, with the prospect that that number will grow to 20-to-25 million by the end of 2011," said Bibb.

"Those numbers are very difficult for publishers to resist," he said, "since tapping even a small percentage for paying subscriptions -- even with the Apple 30 percent charge -- will generate more revenue and more profit than they are likely to be getting from hard copy subscriptions."

Advertising and Competition

Apple has not ironed out the details on how it will implement ads connected to the new service.

"Apple has been fuzzy about how they will handle ad revenues," said Bibb. "Their own ad program is very tough -- initially, they demanded that any advertiser who wanted to be on the iPad had to commit a minimum of $1 million per year in ad revenue. It's not clear whether Apple will take 30 percent of publisher generated ad revenue, but that's another serious drawback."

Apple's subscription success depends on how much momentum other tablets gain.

"For the moment, Apple has the whip hand and certain publishers -- e.g., Rupert Murdoch -- are figuring they have nothing to lose giving in to Apple's demands and getting on the iPad," suggested Bibb.

"But my strong belief is once the market has viable competitor tablets to the iPad -- probably by Q4, 2011 -- Apple's grip will slacken," he said, "and publishers will find other ways to access the huge and growing market for digital media."